Evidence on the Impact of Internal Control and Corporate Governance on Audit Fees

16 Pages Posted: 19 Mar 2008

See all articles by David Hay

David Hay

University of Auckland - Business School

W. Robert Knechel

University of Florida - Fisher School of Accounting

Helen Ling

affiliation not provided to SSRN

Abstract

Previous studies generally suggest that internal control and external auditing can substitute for each other, so that better internal control will be associated with lower audit fees. However, their empirical results do not support this view. In contrast, previous studies of the interaction between corporate governance and external audit services often assume that they are complementary, and that improved governance is associated with higher audit fees, although the evidence about this issue is also mixed. We examine whether the substitution or complementary controls views apply. We find that measures of internal auditing, corporate governance, and concentration of ownership are all positively related to audit fees, consistent with the explanation that controls are complementary. The study makes a contribution by assisting regulators in understanding the effects of regulation of corporate governance, and by showing auditors and auditing standard setters that the view that internal controls can substitute for external auditing may not be helpful. We also find that these relationships hold only in a relatively less-regulated environment.

JEL Classification: G34, M49, G32, G38

Suggested Citation

Hay, David and Knechel, W. Robert and Ling, Helen, Evidence on the Impact of Internal Control and Corporate Governance on Audit Fees. International Journal of Auditing, Vol. 12, No. 1, pp. 9-24, March 2008. Available at SSRN: https://ssrn.com/abstract=1108505 or http://dx.doi.org/10.1111/j.1099-1123.2008.00367.x

David Hay (Contact Author)

University of Auckland - Business School ( email )

12 Grafton Rd
Auckland, 1010
New Zealand

W. Robert Knechel

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

Helen Ling

affiliation not provided to SSRN ( email )

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